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New Tax Relief Act Aids Service Members, Families

WASHINGTON, Nov. 12, 2003  Legislation signed by President Bush on Veterans Day increases the death gratuity payment to $12,000 and provides that the full payment is tax-free.

That portion of the Military Family Tax Relief Act of 2003 is retroactive to Sept. 10, 2001, to provide for service members who died in the terrorist attacks the following day and in the ongoing global war on terror, said Army Lt. Col. Janet Fenton, director, Armed Forces Tax Council.

"If you are killed on active duty, regardless of whether you're in theater, or in a training accident or die from disease, your family receives $12,000 death gratuity that is not taxed," she added. "And that's a big change. In addition any future increases to the death gratuity will remain tax free."

The death gratuity has been $6,000 since 1991, with half of it being taxed, said the director. "It just didn't seem to be fair for the military family who was left grieving for their service member to get hit with a tax bill," she added.

Capital gain exclusion for home sales is one of the most common areas people were looking for tax relief in, said Fenton. "This act will allow members to suspend the period of time which they have to sell their home and take the tax exclusion so they won't have to pay that capital gains," said Fenton. "It's retroactive to 1997 so military members who have sold their homes since 1997 have one year from Nov. 11, 2003, to request a refund for any tax they did pay."

Since 1997, when the law was previously changed, if service members who owned a home got reassigned more than 50 miles from that home or was ordered to move on post, they were no longer able to roll over the gain from that sale to the next home they purchased.

Also since 1997 individuals could exclude up to $250,000 ($500,000 for married couples) of gain from the sale of a home if they resided in the home for two of the five years preceding the sale. Under this act military and Foreign Service personnel can suspend (for up to 10 years) the time transferred away from home on official extended duty for purposes of applying the five-year portion of the two-out- of-five-year rule.

The 2003 act also includes above-the-line deduction for overnight travel expenses of military reservists and National Guardsmen who have to travel more than 100 miles to attend drills or meetings.

"The act allows for an above-the-line, which means you don't have to itemize your taxes to take advantage of this deduction," said Fenton. She added that service members will "be able to deduct unreimbursed travel expenses such as lodging, 50 percent of meals and any transportation costs." This part of the act is retroactive to Jan. 1, 2003.

When the tax code changed in 1986, it said any military benefit existing in September 1986 would remain tax-free, said Fenton. However, it was always unclear whether military child care was included in that, she added. "This act merely makes it clear that those provisions of child care were intended to be tax-free to military members."

The tax act also provides for extra tax-filing time for troops serving in contingency operations. The internal revenue code allows service members who are serving in combat zones or hazardous duty areas to have an extension of time usually 180 days from the time the person leaves the combat zone -- to file taxes.

"A lot of military operations don't rise to the level of being declared by the president as 'combat,'" said Fenton. "But there are several contingency operations where service members are outside the continental United States."

The act also includes modifying eligibility criteria of tax-exempt veterans organizations; tax-free treatment of homeowners' assistance program payments; suspension of tax- exempt status for designated terrorist organizations; and extension of victims' tax relief to astronauts who die on space missions.